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Hedge funds, seeking a windfall on the preferred shares of the mortgage guarantors, want FNMA and FMCC sold in a public offering and replaced by a private-sector mortgage market. But the plan hasn't gotten much reaction in Washington. Mentioned: General Motors (GM), AIG (AIG).

If the hedge-fund industry owns a congressman, then that congressman owes his paymasters an apology. The funds are getting nowhere on Capitol Hill in their Quixotic quest to have the government turn loose
Fannie MaeFNMA 3.389830508474576%Fannie MaeU.S.: OTCBBUSD3.05
0.13.389830508474576%
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:
10354662
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3416344928.26858
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16382200More quote details and news »FNMAinYour ValueYour ChangeShort position
and
Freddie MacFMCC 3.942652329749104%Freddie MacU.S.: OTCBBUSD2.9
0.113.942652329749104%
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1813622752.91275
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3245600More quote details and news »FMCCinYour ValueYour ChangeShort position
as private-sector companies with no government backing. In fact, two recent proposals—a House "discussion draft" and a bipartisan Senate bill—call for a controlled disintegration of the discredited mortgage-guarantee companies and the creation of a private secondary mortgage marketplace. They aren't moving very fast, either.

The hedge funds, as I reported earlier this year ("Fannie, Freddie, Zombie," May 13), claim that the mortgage giants have fully recovered from the swoon that forced them into government receivership and thus should be turned loose, à la
General MotorsGM 0.3190640787024727%General Motors Co.U.S.: NYSEUSD37.73
0.120.3190640787024727%
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:
6728015
P/E Ratio
21.497142857142858Market Cap
60565864994.1199
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3.189792663476874% Rev. per Employee
721893More quote details and news »GMinYour ValueYour ChangeShort position
(ticker: GM) and
American International GroupAIG -0.1078167115902965%American International Group Inc.U.S.: NYSEUSD55.59
-0.06-0.1078167115902965%
/Date(1425417840811-0600)/
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:
4445608
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10.598882340600026Market Cap
76376067450.6165
Dividend Yield
0.8997498695362689% Rev. per Employee
981769More quote details and news »AIGinYour ValueYour ChangeShort position
(AIG). The government injected $187 billion into Fannie (FNMA) and Freddie (FMCC) and is still owed about $55 billion, which is being paid back via dividends from special preferred stock. The hedge funds assert that if the two were let loose, they could raise enough money through public stock offerings to fully repay the government immediately and have enough left over to award holders of previously issued preferred about $25 a share. Following the collapse of the mortgage companies in 2008, the hedge funds took a gamble and scooped up these preferred shares at about $2 to $4 each, which explains their ardor for a spinoff.

THE DISCUSSION DRAFT IS THE WORK of Texas Republican Rep. Jeb Hensarling, chairman of the House Financial Services Committee. Conservatives love the Hensarling document because in addition to deep-sixing Fannie Mae and Freddie Mac, the former playthings of morally suspect politicians, it significantly narrows the federal role in the mortgage market. Politicians never can resist pressuring bureaucrats into watering down underwriting standards on government-guaranteed mortgages, so that more of their constituents can benefit. This includes constituents who are unable to afford a house, regardless of the terms. Peter Wallison, a research fellow at the American Enterprise Institute, notes that the down payments on FHA-backed loans over the years declined from 20% to 3%. Now, the Federal Housing Administration requires a taxpayer bailout, he says.

The bipartisan Senate bill, the work of Virginia Democrat Mark Warner and Tennessee Republican Bob Corker, also eliminates Fannie Mae and Freddie Mac. It would create a Federal Mortgage Insurance Corp. to insure 90% of a loan in the event of a housing "catastrophe" like a superstorm or financial crisis.

The real-estate and mortgage industries love the Senate bill because the guarantee would make it easier to sell mortgages into the secondary market in good times and in bad. Those guarantees, according to conservatives, would serve as the seed corn of a future housing catastrophe by causing excess credit to flow into residential real estate.

Economists believe a resolution to the Fannie-Freddie problems is essential for a full housing recovery. On Thursday, Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee, "It's time to do this." It's unlikely, however, that reform will occur while Congress remains divided. Hensarling's draft is too conservative for the Senate, and the Senate bill is too liberal for the House. So hedge funds have until 2015 to buy a congressman.